RED SANDS. creating a better lifestyle SAMPLE RESOURCE. Cost Benefit Analysis. Resources for Courses

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1 Resources for Courses

2 Purpose This resource is designed to enable students to understand and analyse the concept of (COBA) at both AS and A level of Economics. Requirements To complete this activity, the teacher will need this resource pack and the Powerpoint presentation Redsands Cost Benefit Analaysis.pptx. Page of this pack is a general sheet giving a definition and the purpose of cost benefit analysis that should be printed off for each student in the group. The following pages to this pack have individual proposals these are to be given to students in groups so the teacher will need to copy each sheet (each proposal covers two sides) for every student in the smaller groups. The final page of this pack is a generic sheet on the disadvantages of COBA that should be printed off for each student in the group. Running the activity The teachers should separate the class into groups there are 7 possible proposals so up to 7 groups can be created (it is not recommended to have only or groups). The teacher should show the students the introductory Powerpoint slideshow Redsands Cost Benefit Analaysis.pptx this sets the scene for both the case study and the activity that follows. Hand out the initial worksheet on the definition and purpose of COBA and ensure all students understand its purpose. Give individual proposals to each of the sub-groups. Allow the groups two minutes to read the particulars of their individual proposals. Explain the questions asked in the worksheets and then allow up to 0 minutes for the students to prepare a COBA answering the questions on the worksheet (the slide has a 0 minute timer included). Allow each of the groups to feedback and then lead a general discussion on which proposal would appear to the have the most (there is no definitive answer to this question it allows for debate about the relative of COBA). Show the final slide, asking the question about disadvantages of COBA. Hand out the final worksheet giving further evaluation of COBA.

3 Definition and purpose Proposed Site Cost benefit analysis (COBA) is a technique for assessing the monetary social costs and benefits of a capital investment project over a given time period. The principles of cost-benefit analysis are: Appraisal of a project: It is an economic technique for project appraisal, widely used in business as well as government spending projects (for example should a business invest in a new information system) Incorporates externalities into the equation: It can, if required, include wider social/environmental impacts as well as private economic costs and benefits so that externalities are incorporated into the decision process. In this way, COBA can be used to estimate the social welfare effects of an investment Time matters! COBA can take account of the economics of time known as discounting. This is important when looking at environmental impacts of a project in the years ahead

4 The Main Stages in the Approach At the heart of any investment appraisal decision is this basic question does a planned project lead to a net increase in social welfare? Stage (a) Calculation of social costs & social benefits. This would include calculation of: Tangible Benefits and Costs (i.e. direct costs and benefits) Intangible Benefits and Costs (i.e. indirect costs and benefits externalities) Stage (b) - Sensitivity analysis of events occurring this relates to an important question - If you estimate that a possible benefit (or cost) is x million, how likely is that outcome? If you are reasonably sure that a benefit or cost will occur what is the scale of uncertainty about the actual s of the costs and benefits? Stage : - Discounting the future of benefits - costs and benefits accrue over time. Individuals normally prefer to enjoy the benefits now rather than later so the of future benefits has to be discounted Stage : - Comparing the costs and benefits to determine the net social rate of return Stage : - Comparing net rate of return from different projects the government may have limited funds at its disposal and therefore faces a choice about which projects should be given the go-ahead

5 Proposal for a new cinema There is an interest from a national cinema chain to rent the entire site from the council and provide a 0 screen cinema. The cinema will also house a fast-food restaurant (yet to be decided upon) and create a 500 space car park within the site. The lease would last 5 years. The cinema would create up to 00 jobs. There is already a cinema complex in the city centre. Task : List up to possible Private Benefits (benefits to cinema users and the cinema company) List up to possible External Benefits (benefits to the general public other than those using the cinema) List up to costs or benefits that you think it would be most possible to attach a monetary List up to possible Private Costs (costs to cinema users and the cinema company) List up to possible External Costs (costs to the general public other than those using the cinema) Task : Monetary to your analysis Looking at your lists above list the costs and benefits that you would most be able to attach a monetary to, and those which you would least be able to attach a monetary to: List up to costs or benefits that you think it would be least possible to attach a monetary

6 Task : Sensitivity of costs and benefits Looking at those aspects where you have determined that there is a clear monetary, say which one is the most sensitive to change (and therefore the most difficult cost or benefit to estimate) and then state your reason why. The cost or benefit that is most sensitive to change: The reason why you think that this is most sensitive to change: Task : Net of the proposal Although it is difficult to give a definitive answer without actual monetary costs and benefits, state your opinion about whether the proposal should be considered by Redsands City Council, giving up to reasons for your stated opinion. Should the proposal be considered? Give up to three reasons why you hold this opinion: Get ready to present your findings to the rest of the class!

7 Proposal for a new clothes making factory A small manufacturing company, already based on the outskirts of the city have expressed an interest in purchasing the land to create a new factory (and close down the older smaller factory). The factory would create a further 50 jobs (in addition to those people who already work for the firm). The factory would treat raw materials using chemicals, and give out small traces of pollution during a heat treatment process. Task : List up to possible Private Benefits (benefits to customers and company workers) List up to possible External Benefits (benefits to the general public other than those using the factory) List up to costs or benefits that you think it would be most possible to attach a monetary List up to possible Private Costs (costs to customers and company workers) List up to possible External Costs (costs to the general public other than those using the factory) Task : Monetary to your analysis Looking at your lists above list the costs and benefits that you would most be able to attach a monetary to, and those which you would least be able to attach a monetary to: List up to costs or benefits that you think it would be least possible to attach a monetary

8 Task : Sensitivity of costs and benefits Looking at those aspects where you have determined that there is a clear monetary, say which one is the most sensitive to change (and therefore the most difficult cost or benefit to estimate) and then state your reason why. The cost or benefit that is most sensitive to change: The reason why you think that this is most sensitive to change: Task : Net of the proposal Although it is difficult to give a definitive answer without actual monetary costs and benefits, state your opinion about whether the proposal should be considered by Redsands City Council, giving up to reasons for your stated opinion. Should the proposal be considered? Give up to three reasons why you hold this opinion: Get ready to present your findings to the rest of the class!

9 Proposal for a new hospital The local health authority is interested in creating a small accident and emergency hospital. They would purchase the land from the city council. The hospital would alleviate some of the over-use of nearby hospitals and create 50 jobs. Waste materials would be incinerated. The area would allow for a modest sized car park holding up to 50 cars. Task : List up to possible Private Benefits (benefits to hospital users and the hospital employees) List up to possible External Benefits (benefits to the general public other than those using the hospital) List up to costs or benefits that you think it would be most possible to attach a monetary List up to possible Private Costs (costs to hospital users and the hospital employees) List up to possible External Costs (costs to the general public other than those using the hospital) Task : Monetary to your analysis Looking at your lists above list the costs and benefits that you would most be able to attach a monetary to, and those which you would least be able to attach a monetary to: List up to costs or benefits that you think it would be least possible to attach a monetary

10 Task : Sensitivity of costs and benefits Looking at those aspects where you have determined that there is a clear monetary, say which one is the most sensitive to change (and therefore the most difficult cost or benefit to estimate) and then state your reason why. The cost or benefit that is most sensitive to change: The reason why you think that this is most sensitive to change: Task : Net of the proposal Although it is difficult to give a definitive answer without actual monetary costs and benefits, state your opinion about whether the proposal should be considered by Redsands City Council, giving up to reasons for your stated opinion. Should the proposal be considered? Give up to three reasons why you hold this opinion: Get ready to present your findings to the rest of the class!

11 Proposal for a new office block A national building firm is prepared to purchase the land to build high-rise office blocks on the site. They would sell each of the buildings to individual companies who, in turn, would rent out the office space (with the possibility of up to 0 extra office spaces). There should be enough space to create 00 car park spaces. The city centre already houses the offices of up to 00 firms. It is calculated that the building would take years and could eventually create up to 600 additional jobs. Task : List up to possible Private Benefits (benefits to the firms and employees who would use the offices) List up to possible External Benefits (benefits to the general public other than those using the offices) List up to costs or benefits that you think it would be most possible to attach a monetary List up to possible Private Benefits (costs to the firms and employees who would use the offices) List up to possible External Costs (costs to the general public other than those using the offices) Task : Monetary to your analysis Looking at your lists above list the costs and benefits that you would most be able to attach a monetary to, and those which you would least be able to attach a monetary to: List up to costs or benefits that you think it would be least possible to attach a monetary

12 Task : Sensitivity of costs and benefits Looking at those aspects where you have determined that there is a clear monetary, say which one is the most sensitive to change (and therefore the most difficult cost or benefit to estimate) and then state your reason why. The cost or benefit that is most sensitive to change: The reason why you think that this is most sensitive to change: Task : Net of the proposal Although it is difficult to give a definitive answer without actual monetary costs and benefits, state your opinion about whether the proposal should be considered by Redsands City Council, giving up to reasons for your stated opinion. Should the proposal be considered? Give up to three reasons why you hold this opinion: Get ready to present your findings to the rest of the class!

13 Proposal for a residential area A national building firm is prepared to purchase the land and create up to 5 residential apartment blocks each with up to 5 apartments. The apartments will be aimed at middle to high income earners and some will accommodate up to people and have underground car parking. The building will take up to years to complete, temporarily employing up to 00 people and a further 0 people to maintain the buildings on completion. Task : List up to possible External Benefits (benefits to the general public other than those using the offices) List up to possible External Benefits (benefits to the general public other than those using the apartments) List up to costs or benefits that you think it would be most possible to attach a monetary List up to possible Private Costs (costs to the firms building the apartments and those who purchase the apartments) List up to possible External Costs (costs to the general public other than those using the apartments) Task : Monetary to your analysis Looking at your lists above list the costs and benefits that you would most be able to attach a monetary to, and those which you would least be able to attach a monetary to: List up to costs or benefits that you think it would be least possible to attach a monetary

14 Task : Sensitivity of costs and benefits Looking at those aspects where you have determined that there is a clear monetary, say which one is the most sensitive to change (and therefore the most difficult cost or benefit to estimate) and then state your reason why. The cost or benefit that is most sensitive to change: The reason why you think that this is most sensitive to change: Task : Net of the proposal Although it is difficult to give a definitive answer without actual monetary costs and benefits, state your opinion about whether the proposal should be considered by Redsands City Council, giving up to reasons for your stated opinion. Should the proposal be considered? Give up to three reasons why you hold this opinion: Get ready to present your findings to the rest of the class!

15 Proposal for a new supermarket A national supermarket chain would like to lease the land and build a supermarket on the site. The supermarket would also have 00 car parking spaces. The supermarket already have one store located in the city and may consider closing this. The city has 5 other supermarkets. The site is not located directly next to any other retail stores. The supermarket would create up to 00 new jobs. The lease would last for 5 years. Task : List up to possible Private Benefits (benefits to the customers and owners of the supermarket) List up to possible External Benefits (benefits to the general public other than those using the supermarket) List up to costs or benefits that you think it would be most possible to attach a monetary List up to possible Private Costs (costs to the customers and owners of the supermarket) List up to possible External Costs (costs to the general public other than those using the supermarket) Task : Monetary to your analysis Looking at your lists above list the costs and benefits that you would most be able to attach a monetary to, and those which you would least be able to attach a monetary to: List up to costs or benefits that you think it would be least possible to attach a monetary

16 Task : Sensitivity of costs and benefits Looking at those aspects where you have determined that there is a clear monetary, say which one is the most sensitive to change (and therefore the most difficult cost or benefit to estimate) and then state your reason why. The cost or benefit that is most sensitive to change: The reason why you think that this is most sensitive to change: Task : Net of the proposal Although it is difficult to give a definitive answer without actual monetary costs and benefits, state your opinion about whether the proposal should be considered by Redsands City Council, giving up to reasons for your stated opinion. Should the proposal be considered? Give up to three reasons why you hold this opinion: Get ready to present your findings to the rest of the class!

17 Proposal for a new sports stadium A consortium of sports clubs have proposed leasing the site and building a multi-purpose sports stadium. The stadium would have a roof and contain an ice-rink (attracting a professional ice-hockey team) and basketball arena (to be used by a professional basketball team). The venue could also be used for nonsports events such as music concerts and will seat up to 500 people. There would be 00 car parking spaces. The venue would create jobs for up to 00 people. The lease would last for 0 years. Task : List up to possible Private Benefits (benefits to the customers and owners of the stadium) List up to possible External Benefits (benefits to the general public other than those using the stadium) List up to costs or benefits that you think it would be most possible to attach a monetary List up to possible Private Costs (costs to the customers and owners of the stadium) List up to possible External Costs (costs to the general public other than those using the stadium) Task : Monetary to your analysis Looking at your lists above list the costs and benefits that you would most be able to attach a monetary to, and those which you would least be able to attach a monetary to: List up to costs or benefits that you think it would be least possible to attach a monetary

18 Task : Sensitivity of costs and benefits Looking at those aspects where you have determined that there is a clear monetary, say which one is the most sensitive to change (and therefore the most difficult cost or benefit to estimate) and then state your reason why. The cost or benefit that is most sensitive to change: The reason why you think that this is most sensitive to change: Task : Net of the proposal Although it is difficult to give a definitive answer without actual monetary costs and benefits, state your opinion about whether the proposal should be considered by Redsands City Council, giving up to reasons for your stated opinion. Should the proposal be considered? Give up to three reasons why you hold this opinion: Get ready to present your findings to the rest of the class!

19 Disadvantages of COBA Problems in attaching valuations to costs and benefits: Some costs are easy to such as the running costs (e.g. staff costs) + capital costs (new equipment). Other costs are more difficult not least when a project has a significant impact on the environment. The attached to the destruction of a habitat is to some priceless and to others worthless. Costs are also subject to change over time I.e. the construction costs of a new bridge over a river or the introduction of electronic road pricing The COBA may not cover everyone affected (i.e. all third parties) inevitably with major construction projects such as a new airport or a new road, there are a huge number of potential stakeholders who stand to be affected (positively or negatively) by the decision. COBA cannot hope to include all stakeholders there is a risk that some groups might be left out of the decision process a. Future generations are they included in the analysis? b. What of non-human stakeholders? Distributional consequences: Costs and benefits mean different things to different income groups - benefits to the poor are usually worth more (or are they?). Those receiving benefits and those burdened with the costs of a project may not be the same. Are the losers to be compensated? To many economists, the equity issue is as important as the efficiency argument. Social welfare is not the same as individual welfare - What we want individually may not be what we want collectively. Do we attach a different to those who feel passionately about something (for example the building of new housing on greenfield sites) contrasted with those who are more ambivalent? 5 Valuing the environment: How are we to place a on public goods such as the environment where there is no market established for the valuation of property rights over environmental resources? How does one nuisance and aesthetic s? 6 Valuing human life: Some measurements of benefits require the valuation of human life many people are intrinsically opposed to any attempt to do this. This objection can be partly overcome if we focus instead on the probability of a project reducing the risk of death and there are insurance markets in existence which tell us something about how much people their health and life when they take out insurance policies. 7 Attitudes to risk e.g. a cost benefit analysis of the effects of genetically modified foods?